There are two main ways the value of your home or investment property will rise:
- You own it for long enough that it increases in value naturally
- You do something to improve the property and quickly add to its value
Both of these methods are tried and tested, and both are good ways to build your wealth as part of a wider investment strategy.
But today we’re talking about the second option: adding value to your property in the short term by renovating. Or, as it’s known in the industry, “manufacturing equity”.
The golden rule of renovating
When you’re spending money to make money by renovating, there is one simple rule to follow: the amount you add in value should be greater than the amount you spend on your renovations.
Spending $30,000 to increase the value of your property by $20,000, for instance, is not a good investment.
There are three main goals of renovating an investment property:
- To achieve capital gains
- To increase the amount of rent you can charge
- To be able to access more equity to fund another investment
If you have identified the potential for adding value to your property through renovation, the next step is to work out how to fund it. In this article we’ll talk you through the main ways you can gather cash to fund a property renovation.
1. Use your own funds
If you have money set aside in a savings account or offset account, this is the simplest way to fund your renovations. The funds are there for you to access at any time, and you don’t have to worry about loan applications and fees.
2. Take out a construction loan
If you need to borrow funds for your renovation, consider a construction loan. This type of product is designed specifically for people who want to build a new home or carry out a renovation project.
The main difference between a construction loan and a regular mortgage is that you access the funds in staggered payments rather than as a lump sum.
There are two benefits of this to you as the borrower. Firstly, you only start paying interest on the money when you receive it, so you don’t have thousands of dollars sitting in your bank account for months on end costing you money. Secondly, you can set the loan up so your builders are paid for each stage of the work they complete – and this gives you more control.
There are a couple of downsides to this type of loan, though.
Construction loans may be subject to less favourable interest rates and you’ll probably have to pay upfront fees to the lender. You may also have to provide proof that your building plans have gained council approval and that your builders have quoted a maximum cost for the project.
Depending on the duration and cost of your renovation project, a construction loan may or may not work out cheaper in the long run. Be sure to run the sums before assuming this is the best finance option for you.
3. Get a home equity loan
If you already have a decent amount of equity in the property you’re renovating – or in another home you own – you may be able to access that equity in the form of a home equity loan.
Say, for example, your property is valued at $700,000 and you have $400,000 of outstanding debt. You can use that $300,000 of equity as security for your loan. You won’t be able to borrow the full amount, of course, because the usual loan-to-value ratio (LVR) policies will apply. However, it’s a good way to release some of the value in your property to make money elsewhere.
If you’re not sure if you have any equity in your property just create your free Monefly account to instantly value your property for free.
4. Top up your existing mortgage
Another option if you already have some equity in your home is to simply add to your current mortgage. Not all lenders will permit this, though, and again you’ll be limited by the lender’s LVR rules. In most cases, the total amount you borrow mustn’t exceed 80% of the value of your property.
5. Refinance your existing mortgage
This is taking option 4 a step further by increasing your mortgage amount to fund your renovations while also switching to a new provider to get a better rate.
Compare your existing mortgage with those currently available from other lenders – you might find that there are some much better deals available. When you apply a lower interest rate over the term of your loan, you could end up saving tens of thousands of dollars. You might also discover a loan that has better features and more flexibility with repayments.
You’ll need to take into account any switching fees when working out how cost effective this option will be.
6. Take out a personal loan
Most of the choices so far rely on you having savings or a decent amount of equity in a property. But what if you’re just starting out and none of these are an option?
You might be able to fund your renovations with a straightforward personal loan. However, this should really be a last resort because this type of loan usually carries higher interest rates than those secured against a property.
Some final advice
Whatever type of loan you decide on, it’s a good idea to check comparison sites to find a deal that suits you.
When budgeting for your renovation, be sure to include all costs associated with your loan such as interest charges, application fees and switching fees. Also account for the time you’ll personally have to put in, any loss in rental income during renovations, and potential delays from bad weather, etc.
Monefly’s app can help you budget for your renovation and track your spending in real time, so it’s easier to stay on target. You can also connect with your team of financial professionals for simple communication when it comes to finding a loan and managing your investments. Sign up for Monefly free today!
- There are various finance options available if you want to add value to a property by renovating
- You can access equity in an existing property by taking out a home equity loan, topping up your mortgage, or refinancing and increasing your loan amount
- Alternatively, you can take out a construction loan or a standard personal loan
- Be sure to budget for all of the associated costs and ensure the amount of value you will add is well above what you’re spending